Understanding Small Order Execution System (SOES)

The Small Order Execution System (SOES) was an automated trading system introduced by NASDAQ in 1984 to facilitate the execution of small retail trades. It allowed small investors to execute orders quickly and efficiently without relying on market makers to manually process transactions.

SOES became widely used after the 1987 stock market crash, as regulators sought to improve liquidity and ensure smaller investors could access fair pricing in volatile markets.

How the Small Order Execution System (SOES) Works

SOES automatically matched small buy and sell orders with market makers at the best available price. The system ensured that orders were executed quickly, preventing delays caused by manual order processing.

Key Features of SOES

• Automatic Order Execution – Orders were filled instantly at the best available price.
• Order Size Limits – Restricted to 1,000 shares per order to prevent manipulation.
• Priority Over Large Orders – Retail traders using SOES could get faster execution than institutional traders.
• Direct Access to Market Makers – Eliminated the need for manual order routing.

Example of SOES in Action

1. A retail trader places a buy order for 500 shares of a NASDAQ stock.
2. The SOES system automatically executes the trade at the best available price from a market maker.
3. The transaction is completed instantly, ensuring fair execution without delays.

Common Challenges Related to SOES

• Exploitation by SOES Bandits – Some traders used SOES to take advantage of market inefficiencies, quickly buying and selling stocks for small profits.
• Limited Order Size – Institutional traders found SOES restrictive due to the 1,000-share cap.
• System Replaced by More Advanced Platforms – As technology evolved, NASDAQ replaced SOES with SuperSOES and other electronic trading systems.

Step-by-Step Solutions for Trading in the Post-SOES Era

1. Use Modern Direct Market Access (DMA) Platforms – SOES no longer exists, but electronic trading systems now provide faster execution.
2. Leverage ECNs (Electronic Communication Networks) – These offer even greater transparency and execution speed.
3. Monitor Market Liquidity – Ensure high-volume stocks for better execution rates.
4. Utilise Algorithmic Trading – Modern algorithms help execute trades efficiently.
5. Understand New NASDAQ Order Systems – SuperSOES and other platforms have replaced SOES with better execution features.

FAQs

What is the Small Order Execution System (SOES)?

SOES was an automated system on NASDAQ that executed small retail trades instantly, ensuring fair pricing and liquidity.

Why was SOES introduced?

It was created to improve market efficiency and ensure small retail traders had quick access to order execution after the 1987 crash.

Who benefited from SOES?

Retail investors who wanted fast, automatic execution without market maker delays.

What was the maximum order size on SOES?

The system limited orders to 1,000 shares per trade.

What replaced SOES?

NASDAQ phased out SOES and introduced SuperSOES, which improved execution for all order sizes.

What were SOES bandits?

Traders who exploited SOES inefficiencies by quickly buying and selling stocks for small profits.

Did SOES apply to NYSE stocks?

No, SOES was exclusive to NASDAQ-listed stocks.

Is SOES still in use today?

No, it was discontinued and replaced by modern electronic trading systems.

How does SOES compare to today’s trading platforms?

Modern trading platforms offer faster execution, lower latency, and greater transparency than SOES.

What lessons were learned from SOES?

SOES demonstrated the importance of automated trading, leading to today’s high-speed electronic markets.